Whenever you’re preparing to apply for a loan, you will have a few big decisions to make. The length of the term can be just as important as the amount of money in the loan and the interest rate.
Assuming two loans with the same sized principals, the one with the shorter term will require higher monthly payments than a long term one. After all, that principal has to be paid back in fewer, yet larger pieces.
Larger monthly payments seem like an intimidating and dissuading characteristic for a short-term loan. However, don’t shy away because of those higher payments. Short-term loans can actually be a really good option and make financial sense.
Less Interest – More and more interest is added to your balance the longer you owe money to the lender. With a shorter term, you will be paying everything back quicker. Thus, there is less time for interest to accrue. Even if the interest rate is actually higher than with a long-term loan, you can save money in the long run.
Lower Interest – Not all short-term loans have lower interest rates. For example, a lender may charge a higher rate in the absence of a secured asset. However, many mortgages with shorter terms often come with lower interest rates. This means that you will be saving money in two ways: both the rate at which interest is applied and the time it has to accrue.
Predictable – It can be difficult to estimate where your finances will be in the distant future. Nobody knows for certain how the economy will be in 20 or 30 years. With a long-term loan, you will still be responsible for payments far into the future, regardless of what your financial situation is. It is much easier to predict and budget for a short-term loan.
Lower stress – Owing money for a long period of time and watching interest accrue takes an emotional and psychological toll. With a short-term loan, you will have paid off your debt much quicker and be free of that burden.
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More Equity – For mortgage loans, a shorter term means that you will be building equity in your home much faster.
No Collateral – While this wouldn’t apply to mortgages, some other short-term loans may not require any of your property as collateral.
Fast Money – Sometimes short-term loans take less time to process. Therefore, if you need quicker access to your money, a short-term loan might be the answer.
Own your home faster – If your loan is a mortgage, paying back the principal faster with a short-term means that you will own your house outright much quicker. This can be very beneficial if you are thinking of selling the home, since you won’t have to share the proceeds from the sale with the lender.
I am Eric Jones, a businessman by profession. Business and entrepreneurship are my passion and I love researching on the various aspects of those areas. I make sure that I don’t miss out any updates and for this reason I read quite a lot. Law is yet another area which I am passionate to know more about.
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